What’s Going on in the Markets April 7, 2018

Notes: I’m sharing a letter that we sent out on Saturday April 7, 2017 to our clients, prospects and friends to let them know how we’re handling this market correction.

Sandwiched between two “down” days in the markets this week (Monday and Friday), were three “up” days, culminating in an overall 1.4% weekly loss in the S&P 500 index. Fears of a full-blown trade war receded on Tuesday, resulting in a mid-week rally that eventually faded on Friday, as trade war fears resurfaced and weighed on the markets.

Despite the threats of a trade war, the outlook for the economy and corporate earnings, the fundamentals that truly drive the markets over the long term, both remain quite positive. Both surveys from the Institute for Supply Management (manufacturing and services) are firmly anchored in growth territory. And although yesterday’s monthly payroll report revealed that there were fewer jobs created in March (probably weather related), the unemployment rate remained unchanged at 4.1%.

The broad market indexes are fluctuating near their recent lows as the market correction (and volatility) continues to unfold. The typical market correction lasts roughly 12 to 16 weeks, and this one is about 11 weeks old. But there are signs that the market is in a final bottoming process that could potentially yield a multi-week or multi-month rally which could start any day now. Corrections never feel good while they’re happening, but they’re a healthy way of “digesting” past gains and to keep the markets from overheating after a prolonged period of going up. January was particularly strong this year, but all those gains and more have been surrendered during this correction.

During this correction, clients may have noticed increased trading activities in their accounts. Our standard practice at the start of and during a correction are to:

  • Raise cash levels by selling some profitable or underperforming positions.
  • Increase hedges (a hedge is risk reducing instrument) through the use of inverse funds (funds that go up when the market goes down) and options.
  • Adjust (short) options that were sold to take advantage of higher premiums and volatility, which results in additional portfolio income as we roll out to later months. Short options also act as hedges on the portfolio.
  • Use technical signals in the market to identify potential bottoms, to begin putting available cash to work in new (now lower cost) positions.
  • When uncertainty and risk are high, but opportunities present themselves, we may decide to limit client risk through the purchase of call options, or by selling put options, instead of purchasing outright shares. Both approaches increase exposure to the market with less risk than outright share purchases.
  • Identify spots where it is deemed prudent to remove or trim hedges to reduce their overall “drag” on the portfolio. Hedges that are removed may be re-instated if the markets unexpectedly turn back down, sometimes even a day or two later.
  • Monitor new positions purchased during the early stages of market recovery to ensure that these positions are “working”, keeping them on a short leash. All such positions are considered short-term until the market ultimately proves itself. Some positions that turn profitable but return to their buy point are sold for a small profit or small loss.

As the market showed signs of making a bottom early in the week, we were particularly active in reducing hedges and testing new positions. Because of Friday’s decline, unfortunately, we found ourselves reinstating some of those hedges and selling some of the newly established positions for a small profit.

Back to square one.

The process of market bottoming is an inexact science, much like the process of investing, so fits and starts are to be expected. As Friday’s decline gave back all the week’s gains and then some, we begin the process of looking for another market bottom next week.

During a correction (or outright bear market) our objectives remain to protect client capital first, and grow it second. Until safer market conditions present themselves, and volatility subsides, we will remain defensive and have a bit of an “itchy trigger finger” with new and existing positions.  We trust and hope that you agree with this approach, even if it increases the number of trades we make. Please excuse the extra trade confirmations that hit your in-box.

Next week kicks off the start of quarterly corporate earnings reporting season, wherein companies report their financial results for the first quarter of 2018. Estimates are that companies expect to report earnings that are on average 17% higher than the first quarter of 2017. If those results pan out as expected or better, we may be looking at this correction in the rear view mirror in a few weeks.

The dichotomy between a solid economy and a nervous, volatile market is a dilemma that requires patient discipline and an understanding of market history. It is still too early to determine if this is just a lengthy correction or if it could lead to a further decline and a full-blown bear market. Given the elevated risk and persistent volatility, however, it’s important to remain defensively positioned and to objectively evaluate key indicators as the evidence continues to unfold.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

 

Source: InvesTech Research

 

What’s Going on in the Markets March 25, 2018

With the threat of a trade war, the appointment of a new National Security Advisor, and potential war drums being pounded, the markets took a pounding of their own last week. After a robust recovery, the stock markets now seem intent on re-testing the February 8th lows.

As stocks went on sale again, there didn’t seem to be a lot of bargain hunters stepping in to take advantage of the lower prices. The S&P 500 lost 5.9% over five days, its worst week since January 2016.

S&P 500 weekly change

This action follows a by-now-familiar pattern: the Trump Administration announces tariffs—this time on Chinese imports with an estimated value of $60 billion a year—but is not specific on the details. Traders fear that there will be retaliation against American products sold abroad, and put a lower value on the large multinational companies that account for most exports and make up most of the major indexes.

The last time this happened, the tariffs involved steel and aluminum, and the panicked sellers later discovered that the impact on global trade was actually quite small, due to negotiated exemptions for major steel producing nations like Canada and South Korea—plus the Euro-zone and Mexico. This time around, the U.S. trade representative has 15 days to develop a list of specific Chinese products to slap the additional taxes onto, and there will be a public comment period before the threatened tariffs go into effect. China has announced that it is developing its own list, and as companies (and farmers) become aware of what is included in its reported $3 billion tariff package, they will lobby for exemptions which may turn this announcement into another tempest in a teapot.

Meanwhile, in the wake of the Cambridge Analytica scandal, admissions that private information on 50 million people had been pilfered, and up to 126 million Americans had seen posts by a Russian troll farm on its site, Facebook shares fell almost 10%, from $176.83 down to $159.39. This took the social media giant down from the 5th largest-capitalization company in the S&P 500 index to the 6th (behind Berkshire Hathaway)—dragging the index down even further.

What’s remarkable about the selloff over things that might or might not happen, is that it came amid some very good news about the U.S. economy. Durable-goods orders jumped 3.1% in February, sales of newly-constructed homes were solid, and Atlanta Fed president Raphael Bostic announced that there were “upside risks” in GDP and employment. Translated, that means that the economy is looking too good to keep interest rates as low as they have been—which means this is a curious time to be selling out and heading for the investment sidelines.

Of course, that doesn’t mean that the market can’t “correct” further. As the market tests the February 8 lows, an overshoot to a new low cannot be ruled out, but all the selling last week is at least arguing for a robust bounce, which I expect to materialize this week. The quality and durability of that bounce will tell us a lot about the strength of the market going forward.

The week before the Easter holiday tends to be seasonally bullish, as long as cooler heads prevail.  If you haven’t lightened up your portfolio risk in a very long time, and feel the need to reduce your stock fund exposure, that may be a better time to lighten up your risk. Heck, if you’re under-exposed to stocks, this may be a good place to pick up some of your favorite names at a discount.  Disclaimer: this is not a recommendation to buy or sell any securities.

For our clients, we have reduced exposure to some overvalued stocks and funds over the past several weeks, increased exposure to some undervalued ones, and have increased our hedges to reduce our overall risk. For the most part, however, the benefit of the doubt goes to this bull market until economic and market conditions change drastically.

Whatever you do, don’t panic as a result of the headlines. There’s always a better time to sell, and that’s not into the teeth of a headline driven sell-off. As I’ve said before, market volatility is the price we pay for the superior returns of stocks, and now that’s what we’re paying for. Stocks can only give you superior returns if you don’t panic out of them at the first sight of turbulence.

If you would like to review your current investment portfolio, your level of risk. or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

http://theirrelevantinvestor.com/2018/03/23/8750/

https://www.marketwatch.com/story/heres-why-the-stock-market-took-the-china-tariffs-so-hard-2018-03-22

https://www.usatoday.com/story/money/2018/03/22/stock-market-falls/448665002/

http://www.symbolsurfing.com/largest-companies-by-market-capitalization

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

It’s My Turn to Retire-How do I Pay Myself?

It’s no surprise that more and more of my clients (and prospects) are coming to me as they approach retirement and are increasingly anxious about how to make the transition from accumulation of their retirement funds to distribution of those funds. Questions like “when should I claim social security, how much is safe to withdraw each year, what account should I take it from first, how will taxes affect my retirement, how should I safely invest during retirement, what should I budget for healthcare costs, what medicare plans are best for me?” are among the many questions on pre-retirees’ minds.

With an estimated 10,000 people retiring every day, this unprecedented surge of new retirees is expected to last for the next 17 years. Many, perhaps most, will roll their retirement plan assets into an IRA account, and that money–plus Social Security, possibly a small pension and any taxable retirement accounts they may have–will provide their living expenses for the rest of their lives.

This is different from retirees in the past, who often received regular sizeable payments from their defined benefit plans–their equivalent of a retirement paycheck. Millions of new retirees are being required to make a new kind of calculation: how do I translate a lump sum retirement account into sustainable income over the rest of my retirement? For those of us who are accustomed to receiving income throughout our lives, this is not an easy calculation to make.

Suppose, for example, a 65-year-old couple retires, and when their pension assets are rolled into the IRA, they have a total of $4 million between the IRA and their retirement accounts. They can start receiving $1,750 a month from Social Security. With so much money in the bank, they feel comfortable joining an expensive country club, traveling around the globe, and before long, a large recreational vehicle is parked in their driveway. They remodel the kitchen. By age 68, they still have $2.5 million in the bank and are back down to spending $170,000 a year (including taxes). Are they all right, or not?

This is the kind of calculation that financial planners who serve retiree couples wrestle with all day long, and there are few definitive answers. Some of the pioneering research into safe spending in retirement, most notably by Bill Bengen of La Quinta, CA, take into account what is called “sequence risk”–meaning that some unlucky retirees will experience a severe market drop in their early years, which will make it more likely that they’ll run out of money before they die. The research assumes that the retired couple wants to raise spending, each year, at exactly the inflation rate, so they maintain spending power and overall lifestyle. Then it looks at the historical market returns, and identifies a spending level that would have survived even the worst sequence risk scenarios. The answer is between 4% and 4.5% of the retirement portfolio in the first year, with that dollar amount rising with the inflation rate each year (that approach requires retirement savings of approximately 20-22 times your annual lifestyle budget expected in retirement) .

In our hypothetical retiree example, Social Security is paying for $21,000 of the couple’s living expenses, meaning the portfolio has to come up with an additional $149,000, indexed to inflation, for the next 30 or so years. That comes to almost exactly 6% of the remaining portfolio. The couple feels financially solvent, but they are really highly at risk if the market turns down in the next few years.

Other research, notably by Jon Guyton of Minneapolis, MN, has factored in the possibility that a retired couple will be willing to forego inflation increases in years when their retirement portfolio has lost money. This so-called “adaptive withdrawal” strategy allows a retiree couple to raise spending to approximately 4.8% of the initial portfolio. Once again, under this other scenario, our hypothetical couple is in the spending danger zone. And this only covers a 30-year period. People who live longer would need to live on somewhat less–but how do you know how long you’ll live?

Others, including Jim Shambo of Colorado Springs, have looked at the Bureau of Labor Statistics research on actual spending in retirement, and found data that questions the assumption that people in retirement only increase their yearly spending by the inflation rate. Shambo found that the government-calculated Consumer Price Index appears to understate actual yearly increases in retirement spending by as much as one and a half percentage points a year–meaning if the CPI goes up by 3%, actual spending may rise by anywhere from 3.25% to 4.5%. Using a more complex calculation, Shambo found that people age 75 and older were spending between 13.2% and 22.07% more than the inflation statistics would indicate.

Of course, all of this research focuses on surviving the worst-case scenario–the times when the markets are least favorable to a comfortable retirement. If the market climate is, instead, sunny during the early years of retirement, if our hypothetical couple happened to retire in the early years of a bull market, then their current spending won’t be a problem, and they may actually be able to increase their lifestyle expenditures.

Self-serving statement alert: The only way to stay in the safety zone is to have a professional run the numbers every year in light of recent market activity and long-term guidelines, and help you chart a course through the income maze. Converting a portfolio into a paycheck is a surprisingly complex exercise. Ten years down the road, when a few million baby boomers are well into retirement, you may be reading about some of the simple, innocent, tragic mistakes they made with their spending decisions when it felt as if they were flush with cash.

If you would like to review your retirement income options, current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:  http://www.fpanet.org/journal/HowtoAchieveaHigherSafeWithdrawalRate/

http://www.advisorperspectives.com/newsletters12/The_Fallacies_in_Todays_Retirement_Plan_Assumptions.php

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

How Firm is your Investment Character?

One time Fidelity Magellan Fund manager and investing legend Peter Lynch once said “The real key to making money in stocks is not to get scared out of them.”

Benjamin Graham said “What investors need, but few have, is a “firmness of character.”” What he was referring to is the ability for investors to keep their emotions in check.

Investing success is more influenced by DQ than IQ. Our Discipline Quotient, or the ability to remain disciplined during emotional times, is what sets investors apart. Exercising investment discipline is a difficult, but not impossible endeavor.

Buy Low, Sell High

Every investor wants to buy low and sell high, yet it is so much easier to sell low and buy high; it just feels right at the time. Very few investors have the discipline to buy low or sell high because it is contrary to how we feel.

The price to earnings ratio (P/E) is a financial statement term that compares the price of a stock to the annual earnings per share (also called the earnings multiple).  Would you rather purchase a basket of stocks with an average P/E ratio of 13 or 34? Well, if you want to buy low, then 13 would be your answer. Yet, in March of 2009 with a market P/E of 13, no one wanted to touch stocks. Why would they? The expectation was that they would be going down a whole lot more.

Fast forward to 2018.  Now that the P/E is above 34 and the future looks positive, investors can’t seem to get enough of stocks.1 We often allow feelings, which are fleeting, to drive our investment decisions.

Keeping it Cognitive

One of the best ways to keep emotions at bay is to ask reflective questions. An honest assessment can often dampen emotions (less giddy during good times, less fearful during bad times), and empower you to make more thoughtful decisions.

Questioning valuation, investor sentiment, debt etc… can engage the thinking brain (which forces emotions out), and give us a chance to analyze the situation. We can then calculate the actual risk, rather than rely on our emotionally skewed perception of risk.

Knowing Yourself

Our perception of risk is highly fluid – it’s based on mood, media headlines and expectations. As humans, we tend to perceive less risk when times are good and overestimate risk when times are bad.

We are all influenced by emotions, especially with respect to our own money. That’s just part of being human. As your advisor, one of my primary roles is to help you remain disciplined and stick to your plan. Together, we can think things through and ensure that decisions are based on sound judgement and fair valuations, not on how we feel.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1) P/E calculations based on Shiller method for S&P 500 Index. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.

Information provided by The Emotional Investor, a member of The Behavioral Finance Network. Used with permission.

 

What’s Going on in the Markets February 5, 2018

It’s been a long time, more than a year, since I’ve posted an article about what’s going on in the markets. Market volatility, until last week, has been mostly subdued. For what seems like years now, markets seemed immune from any meaningful drop. But this still young month of February has seen volatility return with a vengeance.

This means that the U.S. stock market will finally get something that happens, on average, about once a year: a 10+ percent drop—the definition of a market correction.  The last time this happened, better known as a bear market, was a whopper: the Great Recession drop that caused U.S. stocks to drop more than 50%–so most people today probably think that corrections are catastrophic.  They aren’t.  More typically, they last anywhere from 20 trading days (the 1997 correction, down 10.8%) to 104 days (the 2002-2003 correction, down 14.7%).  Corrections are unnerving, but they’re a healthy part of the economy and the markets—for a couple of reasons.

Reason #1: Because corrections happen so frequently, and are so unnerving to the average investor, they “force” the stock market to be more generous than alternative investments.  People buy stocks at corporate earnings multiples which are designed to generate average future returns considerably higher than, say, cash or municipal bonds—and investors require that “risk premium” (which is what economists call it) to get on that ride.  If you’re going to take on more risk, you should expect at least the opportunity to get considerably more reward.

Reason #2: The stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch.  This gives long-term investors a valuable—and frequent—opportunity to buy stocks “on sale.”  That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.

The current market downturn relates directly to the first reason, where you can see that bonds and stocks are always competing with each other.  Monday’s 4.1% decline in the S&P 500 coincided with an equally-remarkable rise in the yields on U.S. Treasury bonds last Friday.  Treasuries with a 10-year maturity are now providing yields of 2.85%–hardly generous, but well above the record lows that investors were getting just 18 months ago.  People who believe that they can get a decent, relatively risk-free return from bond investments are tempted to abandon the bumpy ride provided by stocks for a smoother course that involves clipping coupons.  Bond rates go up and the very delicate supply/demand balance shifts, at least temporarily, in their direction, and you have the recipe for a stock market correction.

This provides us all with the opportunity to do an interesting exercise.  It’s possible that the markets will drop further—perhaps even, as we saw during the Great Recession, much further.  Or, as is more often the case, they may rebound after giving us a correction that stops short of the technical definition of a bear market, which is a 20% downturn.  The rebound could happen as early as tomorrow, or some weeks or months from now as the correction plays out.

Most bear markets coincide with the onset or expectation of a recession. Some even debate whether a recession causes the bear market or vice versa. The good news is that all indications are such that a recession is not on the horizon. Jobs, housing and many other manufacturing and services data are quite strong, retail sales are healthy, and most importantly, consumer confidence is near all-time highs. While this could all change, it would take at least 9-12 month for conditions to deteriorate enough and make the probabilities of a recession more likely than not. That’s why I believe that a bear market is not imminent.

A correction or even a bear market, once they’re over (no matter how long or hard the fall) you’ll hear people say that they predicted the extent of the drop.  So now is a good time to ask yourself: do I know what’s going to happen tomorrow?  Or next week?  Or next month?  Is this a good time to buy or sell?  Does anybody seem to have a handle on what’s going to happen in the future?

Record your prediction, and any predictions you happen to run across, and pull them out a month or two from now.

Chances are, you’re like the rest of us.  Whatever happens will come as a surprise, and then look blindingly obvious in hindsight.  All we know is what has happened in the past.  Today’s market drop is nothing more than a data point on a chart that doesn’t, alas, extend into the future.

Markets have become very oversold, a market technical term that indicates that we’ve sold off too far too fast. That means a bounce is near, and it may be a big one. If you’re worried about what the markets are doing, and overexposed on your risk, you should use these bounces to hedge your portfolio or sell some portions thereof to the “sleeping point”; that is, the point where you can sleep or get through your day without worrying about your portfolio declining. Think about putting some spare cash in the markets after you see some signs of the markets stabilizing, feeling good about picking them up on sale (Disclaimer: this is not a recommendation to buy or sell any security).

For our clients, over the past several weeks, we have reduced market exposure through sales of certain positions, and have increased our hedges. But we are not preparing for an all-out bear market. In fact, we have been looking to pick up some positions that are much more attractive after this latest selloff. After all, the stock markets are still in an uptrend, the economy is hitting on all cylinders, and there are no signs of an impending recession.

If you are worried or would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://www.fool.com/knowledge-center/6-things-you-should-know-about-a-stock-market-corr.aspx

https://www.yardeni.com/pub/sp500corrbear.pdf

https://finance.yahoo.com/news/stocks-getting-smashed-143950261.html

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

A Strawberry Alarmist?

“Good sense, innocence, cripplin’ mankind
Dead kings, many things I can’t define
Occasions, persuasions clutter your mind
Incense and peppermints, the color of time

Who cares what games we choose?
Little to win, but nothin’ to lose”

— Song Lyrics from the 1967 hit single “Incense & Peppermints” written by Tim Gilbert & John S. Carter and performed by the group known as The Strawberry Alarm Clock

Suppose somebody came up to you and shouted: “I have terrible news about the economy. I think you should sell your stocks!”
Alarmed, you say: “Oh, my God. Tell me more!”
And this mysterious stranger shouts: “Run for the hills! The American economy just added 200,000 more jobs—more than expectations—and the U.S. jobless rate now stands at 4.1%, the lowest since 2000!”
You blink your eyes. So?
“There’s more,” you’re told. “The average hourly earnings of American workers have risen a more-than-expected 2.9% over a year earlier, the most since June of 2009! You should sell your stocks while you can!”

Chances are, you don’t find this alarmist stranger’s argument very persuasive, but then again, you don’t work on Wall Street. After hearing these benign government statistics, traders rushed for the exits from the opening bell to the closing on Friday, and at the end of the day the S&P 500 stocks are, in aggregate, worth 2.13% less than they were last Thursday. The NASDAQ Composite index fell 1.96% and the Dow Jones Industrial Average, a somewhat meaningless but well-known index, was down 2.54%.

To understand why, you need to follow some tortuous logic. According to the alarmist view, those extra 200,000 jobs might have pushed America one step closer to “maximum employment”—the very hard-to-define point where companies have trouble filling job openings, and therefore have to start offering higher wages. No, that’s not a terrible thing for most of us, but the idea is that if companies have to start paying more, then they’ll be able to put less in their pockets—and the rise in the hourly earnings of American workers totally confirmed the theory.

If you’re an alarmist, it gets worse. If American workers are getting paid more, then companies will start charging more for whatever they produce or do, which might raise the inflation rate. “Might” is the operative word here. There hasn’t been any sustained sign of higher inflation, which is still not as high as the Federal Reserve Board wants it to be. But if you’re a Wall Street trader who thinks the market is in a bubble phase, you aren’t necessarily looking at facts to confirm your beliefs.

Suppose you’re not an alarmist. Then you might notice that 18 states began the new year with higher minimum wages, which might have nudged up that hourly earnings figure that looked so alarming a second ago. And some companies have recently announced bonuses following the huge reduction in U.S. corporate tax rates, whose amortized amounts are also finding their way into wage statistics.

Meanwhile, those same government statistics are showing a resurgence in factory activity and a rebound in housing, which together, account for more than 50,000 of those new jobs.

So the question we all have to ask ourselves is: are we alarmists? Selling everything in anticipation of a bear market has never been a great strategy, even though stocks are admittedly still priced higher than they have been historically. Trimming some positions and perhaps putting on some hedges into one of the greatest bull runs of our time makes a lot of sense. But panicking never paid worthwhile benefits to anyone.

If you are not an alarmist, then you have something to celebrate. The S&P 500 has now officially ended its longest streak without a 3% drop in its history—as you can see from the below chart. It’s an historic run not likely to be seen by any of us again. The truth about the markets is that short, sharp pullbacks are inevitable and routine—unless you were living in the past year and a half, when we seemed to be immune from normal market behavior.

Strawberry Alarmist

Although the drop on Friday was a bit “jarring”, and technical indicators point to some internal deterioration, I don’t believe that this is the start of a bear market. Employment, housing and the overall economic environment are way too strong to give way to a recession, at least not in the next six to nine months.

I’ve been saying for months now that the market is way past due for a normal correction, as evidenced by the above chart. A pullback of 10-15% in the markets would be normal and healthy, to allow this market to “rest up” for the next move higher. If you think you’re nimble enough to get out of the markets now, and know when to get back in to catch the next wave higher, then I and 90% of the masses out there can probably learn from you. But as the great fund legend Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” 

If you’re concerned about the markets and you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:
https://www.bloomberg.com/news/articles/2018-02-02/u-s-added-200-000-jobs-in-january-wages-rise-most-since-2009

https://www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap?

https://www.theatlantic.com/business/archive/2018/02/market-dow-drop/552254/?utm_source=atltw

TheMoneyGeek thanks guest writer Bob Veres for his contribution to this post

Running for the Hills

I’ve never seen anything like it. The mere mention of Amazon eyeing another kind of business can send chills down traders’ backs who might own stocks in that line of business. It seems no one wants to be caught owning the next business Amazon might want to conquer.

As a result, on Tuesday morning, Wall Street traders woke up to something they haven’t experienced much of lately: actual market volatility.  One trader posted an image of his Bloomberg terminal at the market opening, which showed an immediate scary-looking plunge in U.S. equities as the opening bell rung.  By the end of the day, American stocks were down more than one percent, the worst one-day loss since last August, and capping the largest two-day loss since last May. One percent! Oh the horror of a selloff.

What’s going on?  Are U.S. stocks really a full percentage point less valuable today than they were yesterday morning?

By the end of the day, it was clear that much of the drop came from a handful of U.S.-based healthcare companies, whose stocks had been unloaded by spooked traders.  Why?  There had been an announcement by Jeff Bezos of Amazon, Warren Buffett of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase, Inc. that they were thinking about forming a new independent healthcare provider.  The market prices of these companies fell anywhere from 1.8% to 8.6% as a result of this new, still-hypothetical competition. Collectively, these healthcare companies saw their total worth—measured by the value of shares outstanding—drop $30 billion in roughly two hours of trading.

Did this make sense?  Surely not.  Experienced stock pickers were basing their decision to sell, sell, sell on how Amazon totally disrupted retail investing. JPMorgan Chase has enormous financial clout and Warren Buffett is a legend in the investing world.  But the “plan” they announced was really more of an intention to create a plan, and it was uncertain whether the new disruptive high-tech healthcare provider would be available to mainstream Americans or just the employees of three very large companies that desperately want to reduce their health insurance costs.

It will be at least a year before we know what Bezos, Dimon and Buffett plan to create, if anything, and more years before any current healthcare provider is disrupted by their new model.  Healthcare companies have time to prepare for the competition, and meanwhile they should not be significantly less valuable one day over another, due to a vague announcement of a plan to do something.

The bigger lesson of the downturn is how easy it is to spook Wall Street traders these days.  With market valuations persistently higher than historical averages, traders seem to be jumping at shadows in hope of avoiding the next downturn.  The challenge they face is that nobody has a reliable way to predict the real thing before it happens.  Jumping at shadows just means, in many cases, running up trading costs and booking losses.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://qz.com/1192731/amazons-push-into-healthcare-just-cost-the-industry-30-billion-in-market-cap/

https://www.ft.com/content/3353179a-05d3-11e8-9650-9c0ad2d7c5b5

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

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